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Journal of Applied Economics and Business
51
ISLAMIC BANKING AND ECONOMIC
GROWTH: AN EMPIRICAL EVIDENCE
FROM QATAR
Mosab I. Tabash1*, Raj S. Dhankar2
1,2Faculty of Management Studies, University of Delhi, Delhi, India
Abstract
This paper examines empirically the relationship between the development of Islamic finance system
and economic growth in Qatar. Using econometric analysis, annually time-series data of economic
growth and Islamic banks’ financing from 1990 to 2008 were used. We use Islamic banks’ financing
funds given by Islamic banks to private sector through modes of financing as a proxy for the
development of Islamic finance system and Gross Domestic Product, Gross Fixed Capital Formation
and Foreign Direct Investment inflow as proxies for real economic growth. For the analysis, the unit
root test, cointegration test and Granger causality tests were done. The empirical results generally
signify that in the long run, Islamic banks’ financing is positive and significantly correlated with
economic growth in Qatar. This reinforces the idea that a well-functioning banking system promotes
economic growth. Furthermore, the results show that Islamic banks’ financing has contributed to the
increase of investment and in attracting FDI in the long term and in a positive way. The results
obtained from Granger causality test reveals a positive and statistically significant relationship
between economic growth and Islamic bank’s financing in the long run. The relationship, however, is
neither Schumpeter’s supply-leading nor Robinson’s demand-following. It appears to be a bi-
directional relationship. However, the results indicate that a causal relationship happens only in one
direction, i.e. from Islamic banks’ financing to Foreign Direct Investment and Gross Fixed Capital
Formation. It means Islamic banking attracts Foreign Direct Investment into the country. We conclude
that government of Qatar should give more attention on Islamic finance to attract more investments.
The findings of research will be of interest to western and Islamic finance practitioners, policy makers
and academicians, who are interested in Islamic finance industry.
Keywords
Islamic finance; Economic growth; Causality; Qatar.
Mosab I. Tabash, Raj S. Dhankar
Islamic Banking and Economic Growth: An Empirical Evidence from Qatar
52 JOURNAL OF APPLIED ECONOMICS AND BUSINESS, VOL.2, ISSUE 1 – MARCH, 2014, PP. 51-67
INTRODUCTION
With global markets suffering from extreme turbulence in the wake of the credit
crunch and subsequent banking crisis, it is the time to examine the merits of an
alternative banking model which adopts a different attitude to risk and finance,
based on the principles of Shariah1. Islamic Banking had grown substantially in the
decade. The recent financial shocks and volatility will provide a good opportunity
for the sector as Non-Muslim bank customers opt for the relative safety of
institutions based on the principles of Islam. Islamic banking and finance is well and
truly established as one of the world’s fastest-growing economic sectors. Islamic
banks provide a variety of products, including: Murabaha, Ijara, Mudaraba,
Musharaka, Al Salam and Istitsna'a, restricted and unrestricted investment accounts,
syndications and other structures.
Islamic finance essentially promotes financial transactions with links to the real
economy and abstains from financing activities that are detrimental to society. It
supports financial inclusion by offering instruments suited to different
socioeconomic groups. Apart from Islamic banking that meets the normal retail
needs of consumers (e.g. mortgage and automobile financing, savings accounts), it
also serves small and medium-sized enterprises. Moreover, there are institutions that
help improve the livelihoods of low-income groups by offering Shariah-compliant
microfinance products based on profit-sharing.
Islamic finance is ultimately founded on the principle of partnership and
cooperation, which calls for a system of equity participation and risk-sharing. Such a
system should promote equal distribution of risk and cooperation between the
providers of funds (investors) and the users of funds (entrepreneurs). Islamic finance
is community-oriented and entrepreneur-friendly, emphasizing productivity and the
physical expansion of economic production and services. Hence, it shifts the overall
focus from financial collateral or the financial worth of a borrower (the current
predominant practice) to the entrepreneur’s trustworthiness and the project’s
viability and usefulness. This feature has important implications for the distribution
of credit risk as well as systemic stability. Islamic finance, therefore, falls under
ethical finance. Both are concerned with the impact of financial decisions on society
and attract ethically-sensitive investors.
The 2008 financial crisis led to difficulties in many conventional banks across the
globe. Islamic banks, in contrast, were largely insulated from the crisis their highly
regulated operational environment guided by Shariah principles prohibited
investment in the type of instruments which adversely affected conventional banks
and which prompted the crisis. The impressive growth rate of Islamic finance and its
1“The Path”, term of Islamic law consists of Islamic instructions based on the Holy Quran and
Sunnah.
Journal of Applied Economics and Business
53
stability during financial crisis attracts the attention of many policy makers and
financial experts worldwide.
Islamic finance will grow with rapid pace in the year 2014 and its volume will pass
through US $ 2 trillion where Islamic banking keeps 78%, Sukuk 16%, Takaful 1%,
Islamic Funds 4% and Islamic Microfinance has 1% share in the Islamic Finance
industry. In 2014, Dubai and London will be in competition to be the global hub of
Islamic Banking and Finance, while Kuala Lumpur will also attempt to be in this
contest but the Islamic finance industry can be grown more through synergizing
approach and alliance with industry stakeholders rather than setting any
competition.
These views were expressed by Islamic Finance expert, Mr. Muhammad Zubair
Mughal, CEO - Al-Huda Centre of Islamic Banking and Economics (CIBE) during an
analysis on Islamic finance industry in the beginning of 2014. He said that the
Islamic finance industry growth will go on double digit in 2014, which will turn the
US $ 1.6 trillion volume of Islamic finance industry in December 2013 to US $ 2
trillion by the end of 2014 including North African countries (Tunisia, Libya,
Morocco, Senegal and Mauritania etc.), rising trends of Islamic finance in Europe
and UK, also the rising and substantial share of international market of Sukuk shall
contribute to it. It is anticipated that India and China may step towards the Islamic
finance in 2014 where more than 200 million Muslim populations are in search of a
compatible financial system with their religious beliefs and thoughts. He said there
is no doubt that international financial crisis will not hit the Islamic finance industry
but due to the Arab Spring, Islamic finance industry has faced recession in some
countries of MENA but there are chances of their revival in 2014 (Zawya report,
2014).
FIG.1 ISLAMIC FINANCE ASSETS, 2000-2011 (Deutsche Bank, 2011)
Mosab I. Tabash, Raj S. Dhankar
Islamic Banking and Economic Growth: An Empirical Evidence from Qatar
54 JOURNAL OF APPLIED ECONOMICS AND BUSINESS, VOL.2, ISSUE 1 – MARCH, 2014, PP. 51-67
Despite the financial crisis, which has plagued the economies of both industrialized
and developing nations, the Islamic finance industry has been flourishing, and has
enjoyed 29% growth in assets to reach more than US $ 600 billion in 2008 (Figure 1).
Despite there are many studies examining the relationship between conventional
finance and economic growth, the studies that examine the relationship between
Islamic finance and economic growth are not too many. The present study tries to
asses empirically the relationship between the development of Islamic finance
system and economic growth in the case of Qatar.
The paper is organized as follows. Section one gives a general introduction about the
current stage of Islamic finance. Section two presents the growth of Islamic finance
in Qatar. Section three explains the research problem, Importance and questions.
Section four illustrates the methodology of the research. Section five includes the
literature review on the relationship between Finance and economic growth, and in
particularly Islamic finance and economic growth. Section six explores the results
and the analysis of the paper. Finally, section seven gives the conclusions of the
paper.
ISLAMIC BANKING IN QATAR
Qatar has the highest GDP per capita in the world as of 2012, according to the World
Fact book (CIA report, 2012). The economic growth of Qatar has been almost
exclusively based on its petroleum and natural gas industries, which began in 19402.
The banking sector in Qatar benefited from rapid economic growth. As a result,
Islamic banks posted strong results over the past few years. During the period
expanding from 1990 till 2008, combined assets of full-fledged Islamic banks of Qatar
including Qatar Islamic Banks, Qatar International Islamic Bank, Qatar Islamic Bank,
Masraf Al Rayan and First Finance Company, generated a impressive increase from
less than US $ 1,000 million in 1990 to more than US $ 30,000 million in 2008, with a
cumulative increase up to 0.98% (Figure 2).
The Banking industry in Qatar consists of 11 local banks registered with the central
bank and 1 foreign bank with branches in Qatar. Under the list of local banks, there
are 4 Islamic banks fully operating under Shariah principles, 3 conventional banks
with Islamic windows and 1 conventional bank with no Islamic banking operations.
Despite the fact that the Qatari banking sector is one of the smallest in the GCC in
terms of total assets, loans and deposits, it achieved significant growth over the past
years. On the whole, Qatari banks are enjoying stellar financial performance,
adequate capitalization, as well as good asset quality. Besides that, banks enjoy
government support, which is continuously working on regulating and improving
the efficiency of the financial services sector (Blominvest report, 2011). Over the last
2 This information can be reached through the website www.onlineqatar.com/info/tourist-info.aspx
Journal of Applied Economics and Business
55
years, financial performance has been supported by fast increasing volumes, despite
pressure on net margins, due to mounting price competition. Some leading players
have started to diversify geographically to gain scale. At the end of 2001, only three
Qatari banks operated in full compliance with Shariah principles, namely Qatar
Islamic Bank, Qatar International Islamic Bank and Masraf Al Rayan. However, since
the change in QCB regulation on Islamic windows in 2001, some conventional Qatari
banks created Islamic subsidiaries or branches.
FIG 2. ISLAMIC BANKS’ ASSETS IN QATAR, 1990-2008
This is notably the case for the three leading banks: Qatar National Bank (QNB),
Commercial Bank of Qatar (CBQ), and Doha Bank (DB). Shariah-compliant assets,
offered by both fully Islamic banks and Shariah-compliant windows (or branches) of
conventional banks, experienced strong growth of more than 91% in 2006. This trend
is likely to continue as banks see Islamic banking as an opportunity to attract new
clientele. Islamic banking assets in Qatar witnessed a strong growth over the last
couple of years, mainly driven by robust economic growth, increased demand for
Shariah-based products and government willingness to promote the Islamic banking
industry.
Many underway projects, including petrochemical, housing and construction
projects are demanding Shariah-based products and this is likely to act as a future
driver for Islamic banking. Qatar Islamic Bank (QIB) is the largest Islamic Bank in
the country, accounting for 8.1% of the total lending market share. The bank has
international presence in collaboration with the Arab Finance House in Lebanon, the
Asian Finance Bank in Malaysia and Durat Al Doha in the Cayman Islands. The
bank is seeking opportunities in Egypt, Turkey and Kazakhstan for potential
Mosab I. Tabash, Raj S. Dhankar
Islamic Banking and Economic Growth: An Empirical Evidence from Qatar
56 JOURNAL OF APPLIED ECONOMICS AND BUSINESS, VOL.2, ISSUE 1 – MARCH, 2014, PP. 51-67
expansion of its Shariah-compliant banking operations. The product portfolio in the
industry includes Murabaha, Ijara, Istisna, and Mudaraba. During the period
expanding from 1990 till 2008, Islamic banks’ financing of all full- fledged Islamic
banks of Qatar generated an impressive increase from less than US $ 110 million in
1990, to more than, US $ 21,313 million in 2008 with a cumulative increase up to
91.60 % due to the support of the government and centeral bank for the Islamic
finance industry as shown in Figure 3.
0
4000
8000
12000
16000
20000
24000
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
IBFinancing
U.S
Mill
ion
FIG 3. ISLAMIC BANKS FINANCING GROWTH IN QATAR, 1990-2008
Shariah-compliant assets, offered by both fully Islamic banks and Shariah-compliant
windows (or branches) of conventional banks, experienced a strong growth of more
than 91% in 2006 (Blominvest report, 2011). This trend is likely to continue as banks
see Islamic banking as an opportunity to attract new clients.
The Islamic Banking industry in Qatar has a great potential for growth backed by a
booming economy, new line of projects and people’s increasing acceptance of
Shariah-based products. Compared to Saudi Arabia and Kuwait, Islamic banking in
Qatar still claims a small share in the total banking assets. With the increased
awareness, the Islamic banking industry in Qatar is expected to grow well in the
near future.
RESEARCH PROBLEM, QUESTIONS AND IMPORTANCE
It is clear that Islamic financial development sector plays an important role in the
overall development of an economy. Although, there are many empirical studies
that examined the relationship between finance and economic growth, but specific
empirical studies on the relationship between Islamic finance and economic growth,
are not too many. To help in filling this gap in literature, this study tries to examine
empirically the relationship between Islamic finance and economic growth, and its
Journal of Applied Economics and Business
57
direction in Qatar. Further, the study gives an answer to the following research
questions.
1. Does Islamic financial development have a significant relationship with
economic growth in the long-term in Qatar?
2. Does Islamic financial development lead to economic growth in Qatar?
3. Does economic growth lead to Islamic financial development in Qatar?
The importance of this study emanates from the fact that it addresses an important
sector in the World economy and particularly in Middle East economies, namely the
Islamic finance industry. It touches everyone in the society, and has a great effect
on any economy positively or negatively. Muslims represent about a quarter of the
world’s population, and there is greater awareness of and demand for Islamic-based
financial products by Muslim and Non-Muslim consumers.
RESEARCH METHODOLOGY
The qualitative and quantitative methods have been used. The data set is extracted
from Word Trade organization, Global Development Finance and Islamic Banks and
Financial Institutions Information (IBIS) database for all Islamic banks’ financing in
Qatar3. To serve our purpose, appropriate variables were established and the long
term relationships between those variables are determined by using econometric
estimation methods. We use annually time series data from 1990 to 2008 for the
variables.
To serve our purpose, appropriate variables were established and the long term
relationships between those variables are determined by using econometric
estimation methods. We use annually time series data for the variables - Islamic
banks’ financing through modes of financing as a proxy for financial sector and two
variables representing real economic sectors: the Real Gross Domestic Product (GDP)
and the Gross Fixed Capital Formation (GFCF), and Foreign Dircet Investment (FDI)
as proxies for economic growth. GDP is a common statistic to represent the income
level of a particular country within a certain time range. Study about finance-growth
nexus always uses GDP as the principal variable reflecting economic growth. We use
the GFCF as a representation of investment, as it is economic indicators of the level
of business activity that measure net new investment by enterprise in the domestic
economy in fixed capital assets during an accounting period. FDI is a common
3The Islamic Banks and Financial Institutions Information (IBIS) database is built to help researchers
and finance professionals working in the area of Islamic economics and finance. It seeks to provide
comprehensive data and information on the activities of Islamic finance institutions, up-to-date
research and literature. It can be reached through the website http://www.ibisonline.net/
IBISHomepage.aspx
Mosab I. Tabash, Raj S. Dhankar
Islamic Banking and Economic Growth: An Empirical Evidence from Qatar
58 JOURNAL OF APPLIED ECONOMICS AND BUSINESS, VOL.2, ISSUE 1 – MARCH, 2014, PP. 51-67
measure of the economic growth. It promotes economic growth in a capital scarce
economy by increasing volume, as well as efficiency of physical investment. In other
words, FDI supplies long-term capital with new technologies, managerial skills, and
marketing capabilities which, in turn, increase economic growth by creating
employment, increasing managerial skills, diffusing technologies and fostering
innovations (Asiedu, 2002).
The first step of the study is to determine the relationship between the financial
deepening and economic growth, and whether the series are stationary or not. In the
model, for a correct evaluation, time series should be separated from all effects, and
the series should be stationary. Thus, logarithms of time series were taken.
Augmented Dickey-Fuller (ADF)(1981) and Phillips-Perron (PP)(1988) tests are used.
After that, Johansen co-integration test was used to examine the long-term
relationship between financial deepening and economic growth. And then, the
Granger causality test is used to test the causality between Islamic bank financing
and economic growth. We use Eviews4 software to test and analyze the results.
LITERATURE REVIEW
The nexus between, and the importance of financial development towards economic
growth have received much attention in the literature of development economics.
From the many research works carried out in this field, there are at least three types
of causal relationships between financial development and economic growth that
have been found:
(1) Supply-leading;
(2) Demand-following; and
(3) Bi-directional causal relationships.
Supply-leading relationship is the creation of financial institutions and instruments
in advance of demand for them in an effort to stimulate economic growth. Demand-
following relationship, on the other hand, appears as a consequence of the
development of the real sector. This implies a continuous widening of markets and a
growing product differentiation which makes necessary more efficient risk
diversifications as well as better control of transaction cost (Hermes & Lensink, 1996).
Out of the extensive research carried out in this field, there are no sufficient works
conducted within the Islamic financial framework. The main objective of this chapter,
therefore, is to narrow the gap in literature by examining the long-run relationship
between Islamic financial development and economic growth, particularly in the
context of Qatar, using econometric analysis.
4Eviews is a statistical and econometric software package, which provides data analysis, regression,
and forecasting tools. It is produced by Quantitative Micro Software (QMS) in Irvine, California, USA.
Journal of Applied Economics and Business
59
Huang and Lin (2009) re-examined the dynamic relationship between financial
development and economic growth on the dataset used in Levine et al. (2000).
Using a novel threshold regression with the instrumental variables approach, they
support a positive linkage between financial development and economic growth,
and found that financial development has an important effect on growth in low-
income countries.
Gries et al. (2009) have tested for the causality between financial deepening, trade
openness, and economic development. This study focuses on 16 Sub-Saharan African
countries, using 20 annual time series observations. For the purpose of establishing
the causal relationships, the Granger Angel method, the Vector Auto-Regression
(VAR), and the Vector Error Correction Model (VECM) were used. This study shows
support for the hypothesis of finance-led growth. It, however, suggests that the
adoption of a more balanced policy approach may reduce financial system
deficiencies among the Sub-Saharan Countries.
Kar et al. (2011) focused on developing countries and also introduced new indicators
of financial development with a view to establishing the causal relationship between
financial development and economic growth. Using countries, which constitute the
Middle East and North Africa (MENA) for the period 1980 to 2007, the study uses a
simple linear model. This model defines economic growth as a function of financial
development. Six new indicators of financial development was introduced and these
include; the ratio of narrow money to income, ratio of broad money to income, ratio
of quasi money to income, ratio of deposit money bank liabilities to income, ratio of
domestic credit to income, and ratio of private sector credit to income. On the other
hand, the real income was employed as a proxy for economic growth. The Granger
Causality test was employed to establish the causal relationship between financial
development and economic growth. The study concludes that the direction of
causality is bi-directional, but it is country or financial development indicator
specific. This study, however, suggests that a strong link may exist between financial
development and the real sector.
Bangake and Eggoh (2011) also supported the view of an existing two-way
directional causality between financial development and economic growth among
developing countries. This study focuses on seventy-one countries, which included
eighteen developing countries, for the period 1960 to 2004. The study carried out its
empirical analysis using both the Panel Cointegration tests and the Panel
cointegration estimation (i.e. Dynamic OLS and panel VECM approach). It
establishes that both financial development and economic growth have influence on
one another, but suggests that a long-run policy approach may prove beneficial
among the developing countries.
Mosab I. Tabash, Raj S. Dhankar
Islamic Banking and Economic Growth: An Empirical Evidence from Qatar
60 JOURNAL OF APPLIED ECONOMICS AND BUSINESS, VOL.2, ISSUE 1 – MARCH, 2014, PP. 51-67
Hassan et al. (2011) focused more on the low- and middle-income countries from
1980 to 2007. This study comprises 168 countries, which are classified by geographic
regions, and uses the panel estimation techniques (i.e. the VAR models). The study
came up with two important findings. These include; a strong long-run linkage
between financial development and economic growth, and two-directional causality
exist between financial development and economic growth among the Sub-Saharan
African countries, the East Asian countries, and the Pacific countries. This study
emphasized the need for the adoption of long-run policy measures among the
developing countries.
Ibrahim (2012) has examined the impact of financial intermediation on economic
growth in Nigeria. Time series data from 1970 to 2010 were used and were gathered
from the CBN publications. For the analysis, the unit root test and cointegration test
were done accordingly and the error correction model was estimated using the
Engle-Granger technique. The growth rate of the real gross domestic product is used
as a proxy for this variable. For financial intermediation, two indicators commonly
used in the literature are used as proxy. These are the ratio of broad money supply
(M2) to nominal gross domestic product (NGDP) and the ratio of domestic credit to
the private sector (CPS) to the nominal gross domestic product (NDGP). While the
former measures the capability of the banks to mobilize funds for investment
purposes, the latter measures the financial opportunities available to firms, most
especially new firms. The paper established that financial intermediation has a
significant impact on economic growth in Nigeria.
With regard to the relationship between Islamic financial development and
economic growth, Abduh and Omar (2012), Furqani and Mulyany (2009), and Majid
and Kassim (2010) are among the limited studies in this area. Abduh and Omar (2012)
identifies that the relationship is bi-directional. Therefore, the government policies in
supporting the development of Islamic finance in Indonesia are strongly needed in
order to support the economic development. However, using different time span of
quarterly data, findings from Furqani and Mulyany (2009), and Majid and Kassim
(2010) are different in terms of the direction of the relationship. Furqani and
Mulyany (2009), on the one hand, states that the relationship between Islamic
financial development and economic growth is following the view of “demand-
following”, which means that growth in real sector economy stimulates Islamic
banking institutions to change and develop. On the contrary, finding from Majid and
Kassim (2010) is in favour of the supply-leading view.
In this study, we examine the relationship between Islamic banking and economic
growth in case of Qatar. This study has some advantages compared to other Islamic
finance studies, for example, the data for all full-fledged-Islamic banks are used.
More variables for economic growth are utilized and more data is collected, since
time series data from 1990 to 2008 is used.
Journal of Applied Economics and Business
61
RESULTS AND DISCUSSIONS
Descriptive Statistics
Table 1 presents summary statistics about the variables used in the econometric
analysis for Qatar. Figure 4, 5 and 6 show the relationship between GDP, GFCF, FDI,
and Islamic banks’ financing in the Qatar graphically.
TABLE 1. SUMMARY STATISTICS (US $ MILLION)
0
20000
40000
60000
80000
100000
120000
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
GDP
IBF
FIG 4. GDP AND IBF GROWTH, 1990-2008
From Table 1 and Figures 4, 5 and 6, one may observe that the maximum value for
the IBFinancing in 2008 reached to (21,313.00) from (0,110.000) in 1990 with standard
deviation of (4,161.294). This gives us an indication of high growth of the Islamic
finance industry in the recent years. The statistics show that the median for GDP,
GFCF, FDI, and IBFinancing is less than the mean, which indicates that the values
are positively skewed.
Statistics GDP GFCF FDI IBF
Mean 26,081.03 10,169.18 1,003.988 2,189.131
Median 12,393.13 4,098.080 338.8100 861.0000
Maximum 111,019.8 43,369.10 4,100.000 21,313.00
Minimum 6,883.120 1,806.320 4.880000 0,110.0000
Std. Dev. 29,341.49 11,961.62 1,463.291 4,161.294
Observations 19 15 19 19
Mosab I. Tabash, Raj S. Dhankar
Islamic Banking and Economic Growth: An Empirical Evidence from Qatar
62 JOURNAL OF APPLIED ECONOMICS AND BUSINESS, VOL.2, ISSUE 1 – MARCH, 2014, PP. 51-67
0
10000
20000
30000
40000
50000
94 95 96 97 98 99 00 01 02 03 04 05 06 07 08
IBF
GFCF
U.S
$ m
illio
n
FIG 5. GFCF AND IBF GROWTH, 1994-2008
0
4000
8000
12000
16000
20000
24000
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
IBF
FDI
U.S
$ m
illio
n
FIG 6. FDI AND IBF GROWTH, 1990-2008
Unit Root Test
Results of ADF and PP Tests applied to time series show that all series belong to
economic growth and financial deepening indicators are not stationary at level. To
make that series stationary, first differences of series have been taken. Failure to
reject the null hypothesis of unit roots implies that the linear combination of the
variables is non-stationary; hence we cannot pursue for the cointegation tests.
The results of Table 2 indicate that the data at the first difference is stationary at α
1%, 5%, and 10% level of significance respectively. For GDP variable, if p value is less
than α, then Ho is rejected, and the series is stationary. The first row shows that the p
value (0.0011) is less than α (0.01) in ADF test. Similarly, for GFCF, the result from
the second row shows that the p value (0.0369) is less than α (0.01) and for FDI, the p
value (0.001) is less than α (0.01) in PP test and also, for IBFinancing, the p value (0.01)
is less than α (0.01) in ADF test. This suggests that the null hypothesis is rejected for
Journal of Applied Economics and Business
63
all variables. Hence, the failure to reject the alternative hypothesis indicates that the
series are stationary.
TABLE 2. UNIT ROOT TEST
ADF Test Phillip-Person Test
Level 1 First difference Level 1 First difference
Country Variable t- statistic
P value
t- statistic
P value
t- statistic
P value
t- statistic
P value
Qatar
GDP -2.008418
0.1618
-4.889116**
0.0011
-2.016949
0.0011
-1.039912***
0.0038
GFCF -0.494621
0.9690
-4.116133
0.0369
-0.638820
0.911
-4.624110**
0.0149
FDI -3.893924**
0.0348
-1.901131**
0.0010
-3.810923**
0.0316
-1.904116**
0.0010
IBFinancing -2.3914
0.3688
-4.1212**
0.01
-2.4421
0.31
-11.8241
0.0001***
*,**,*** Significant at 1%,1%,10% level of significance
Johansen Co-integration Test
Table 3 shows the results of Johansson test for the long relationship between Islamic
banks’ financing and economic growth. The trace test rejects the null hypothesis if
the trace statistics exceeds the critical value.
TABLE 3. JOHANSEN'S TEST (TRACE STATISTIC)
Trace statistics
Critical values
5% 1%
GDP
Null hypothesis Ho: r = 0 23.61001** 15.41 20.04
Alternative hypothesis H1:r ≥ 1 4.991680** 3.16 6.61
GFCF
Null hypothesis Ho: r = 0 19.11819* 15.41 20.04
Alternative hypothesis H1:r ≥ 1 1.181891 3.16 6.61
FDI
Null hypothesis Ho: r = 0 18.01122* 15.41 20.04
Alternative hypothesis H1:r ≥ 1 0.013164 3.16 6.61
** Significant at 1% level
The first row of Table 3 shows that the trace statistics (23.61001) exceeds the critical
value of (15.41) at 91 percent confidence level for GDP and the trace statistics
(19.11819) exceeds the critical value of (15.41) at 95 percent confidence level for GFCF.
Similarly, for FDI, the trace statistics (18.01122) exceeds the critical value of (15.41) at
95 percent confidence level. It suggests that the null hypothesis of no cointegrating
relationships is rejected. The results confirm that there is a cointegrating relationship
among the variables.
Mosab I. Tabash, Raj S. Dhankar
Islamic Banking and Economic Growth: An Empirical Evidence from Qatar
64 JOURNAL OF APPLIED ECONOMICS AND BUSINESS, VOL.2, ISSUE 1 – MARCH, 2014, PP. 51-67
The eigenvalue test tests the null hypothesis of r versus r+1 cointegrating
relationships. This test rejects the null hypothesis if the eigenvalue test statistics
exceeds the respective critical value. Table 4 presents the results from this test.
Similarly, the result from the first row of Table 4 shows that the eigenvalue test
statistics (18.61839) exceeds the critical value (14.01) at 95% confidence level for GDP
and the eigenvalue test statistics (18.31089) exceeds the critical value of (14.01 ) at
95% confidence level for GFCF. Similarly, for FDI, the eigenvalue test statistics
(18.00141) exceeds the critical value of (14.01) at 95% confidence level. This suggests
that the null hypothesis is rejected. Hence, the failure to reject the alternative
hypothesis indicates that there is one cointegrating relationship among the variables.
TABLE 4. JOHANSEN'S TEST (MAX-EIGENVALUE STATISTIC)
Max-
Eigenvalue
Critical values
5% 1%
GDP
Null hypothesis Ho: r = 0 18.61839** 14.01 18.63
Alternative hypothesis H1:r = 1 4.991680** 3.16 6.61
GFCF
Null hypothesis Ho: r = 0 18.31089 14.01 18.63
Alternative hypothesis H1:r ≥ 1 1.181891 3.16 6.61
FDI
Null hypothesis Ho: r = 0 18.00141* 14.01 18.63
Alternative hypothesis H1:r ≥ 1 0.013164 3.16 6.61
** Significant at 1% level
The results from Table 3 and 4, if read together, show that the null hypotheses of
non-cointegation are rejected at 1% level of significance. This suggests that in the
long run Islamic banks’ financing contributes in the growth of GDP and investment
of Qatar. It is clear from Table 4 that there is a long term relationship between
Islamic Banks financing and foreign direct investment in Qatar.
Granger Causality Test
Statistics and probability values constructed under the null hypothesis of
noncausality are reported in Table 5. It can be observed that there is a causal
relationship between Islamic banks financing and GDP. However, our results show
that two-way causality exists from Islamic banks’ financing to economic growth and
from GDP towards Islamic Banks’ financing; since the probability values 0.01931 and
0.03306 are less than 0.01. So, the null hypothesis is rejected, and it can be concluded
that the higher flow of Islamic finance has led to the growth of the economy. At the
same time, the development of the real sector economy stimulates Islamic banking
institutions to change and develop.
Furthermore, the results show there is a unidirectional causality between Islamic
banks’ financing and investment since it is significant at 1% level, as (0.04094) less
Journal of Applied Economics and Business
65
than (0.01). Thus, Islamic banks’ financing granger causes the development of real
economic growth in Qatar. The causality between Islamic banks’ financing and FDI
is also a unidirectional since it is significant at 1% level, as 0.01661 less than (0.01) for
two variables respectively.
TABLE 5. PAIR WISE GRANGER CAUSALITY TESTS
Null Hypothesis F statistics Probability
IBF does not Granger Cause GDP 1.11321 0.01931**
GDP does not Granger Cause IBF 4.13842 0.03306**
IBF does not Granger Cause GFCF 1.31921 0.04094*
GFCF does not Granger Cause IBF 1.22686 0.29161
IBF does not Granger Cause FDI 1.26112 0.01661**
FDI does not Granger Cause IBF 1.06169 0.31916
***** Significant at 5, 10% level of significance
CONCLUSION
This paper makes an attempt to examine the relationship between the development
of Islamic finance and economic growth in the long-term in Qatar using econometric
analysis. We analyzed empirically the relationship between Islamic banks’ financing
and economic growth. Data for all variables are stationary after first difference.
Therefore, the Johansen’s co-integration technique has been applied. The co-
integration results provide evidence of a unique cointegrating vector. In other words,
there is a long-term stable relationship between Islamic banks’ financing and
economic growth in case of Qatar. That means Islamic banks’ financing and
economic growth move together in the long-run.
We also find that the causality relation exist in a bi-directional relationship from
Islamic banks’ financing to economic growth and vice versa. Our results also
indicate that improvement of the Islamic financial institutions in the Qatar will
benefit from economic development, and it is important in the long run for the
economic welfare, and also for poverty reduction. Furthermore, the results from
causality tests shows that there is a causality relation exist from the IBfinancing to
investment and FDI of Qatar. The results presents that Islamic finance is a suitable
environment for attracting FDI into the country and FDI reinforces Islamic finance.
The results of study are quite significant as it is one of the pioneering studies of
Islamic finance.
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